I use photoshop for the artwork, linen paper (any nicely textured paper will do) for the labels, a nice fancy laser printer (at my university) for the printing, a paper cutter, and 3M spray adhesive for the glue. Haven't tried milk yet, I'm a little reluctant to have sour milk smells

+1 on this method - originally. I used to used plain paper and an inkjet but then ran it through a copy machine so the ink wouldn't run. I too used milk applied with a babeque brush. The labels actually stick very solidly to the bottle.

I switched to a glue stick to avoid the mess from the milk. It was less messy, faster, and the labels float right off after a quick soak in hot water.

I now use Avery 5164 mailing labels. I can use color from the printer, I don't have to cut the individual labels from the master sheet and they're even quicker to apply. The downside is that they're also more difficult to remove but still not bad.